Investors had a collective R750 million invested in African Bank preference shares a week-and-a-half ago, but the shares lost 92 percent of their value before trading in the shares on the JSE was suspended this week, and most unit trust fund managers have written down their values to zero.
Unit trust investors may have been exposed to African Bank preference shares through funds that aim to generate an income or through multi-asset funds.
Some wealthy investors invested directly in African Bank preference shares to generate tax-efficient dividends, rather than interest income. Interest income beyond the exemptions is taxed at your marginal tax rate, with the highest tax rate being 40 percent.
If a company is wound up, holders of preference shares should have their capital repaid after debt-holders have been paid, the JSE says on its website, but this week the stock exchange said only that it will communicate with shareholders once the curator of African Bank has found a solution that balances the interests of all stakeholders.
Gareth Stobie, the fund manager of the Grindrod Diversified Preference Share Fund, says it is not clear yet whether shareholders will recover anything.
In the meantime, many unit trust funds have decided that it is prudent to value African Bank’s shares at zero.
Grindrod’s fund had a 3.5-percent weighting to African Bank preference shares before the bank’s trading update on Wednesday, August 6.
Stobie says Grindrod managed to sell half its exposure to African Bank preference shares by the time the shares were suspended.
Therefore, the fund has incurred a net loss in value of 2.5 percent, which is “regrettable”, he says.
Stobie says there are only 19 issuers of preference shares in the R31-billion preference share market, and African Bank was a meaningful issuer of these shares. They were paying a good dividend and had been rerated to reflect the bad news about African Bank’s trading position over the past two years.
He says Grindrod has been a net seller of the shares for the past two years, selling down over 20 percent of its holding, but it was surprised at how African Bank’s position deteriorated, because it had expected that the bank’s long-term debt instruments would hold it through a bad market cycle.
Coronation’s Preference Share Fund had no exposure to African Bank preference shares, the company confirmed this week.